2015 (1) TMI 832 - HC - Income Tax

Reopening of assessment - dis proportionate allocation of the common expenses between the three manufacturing units for the purposes of claiming deduction under Section 80IA/IB - Held that - Once a query has been raised during the assessment proceedings and the Petitioner has responded to the query to the satisfaction of the Assessing Officer as is evident from the fact that the Assessment Order dated 9th March, 2005 accepts the Petitioner's claim for deduction under Section 80IA/IB of the Act. It must follow that there is due application of mind by the Assessing Officer to the issue raised. Reopening notice has to stand or fall on the basis of the reasons recorded at the time of issuing the notice for reopening. It is not open to the Assessing Officer to improve upon the reasons recorded at the time of issuing the notice either by adding and/or substituting the reasons by affidavit or otherwise. The tangible material i.e. letter dated 15th January, 2007 on which the Revenue relies upon for issuing of the notice, could have undoubtedly been the basis for issuing the impugned notice even if the same has been obtained in assessment proceedings for a subsequent assessment year provided the same was the basis of the impugned notice and so recorded in the reasons in support of the impugned notice. Thus reliance by the Revenue upon the letter dated 15th January, 2007 from the Additional Commissioner of Income Tax cannot be read into the reasons recorded while issuing the impugned notice. Thus once an assessment order is being passed, it has some sanctity. If the assessment order is to be disturbed, then the Assessing Officer must strictly satisfy the condition precedent as provided under Section 147/148 of the Act before he can issue a notice, seeking to reopen an assessment. In this case, as we have pointed out herein above, there has been a change of opinion on the part of the Assessing Officer in issuing a notice and, therefore, he has no reason to believe that income chargeable to tax has escaped assessment. In these circumstances, the jurisdictional requirement for issuing a notice is not satisfied and, therefore, the impugned notice and the consequent order dated 14th November, 2007 disposing of the objections, are not sustainable. - Decided in favour of assessee.

Issues Involved:
1. Challenge to the notice issued under Section 148 of the Income Tax Act, 1961.
2. Allegation of disproportionate allocation of expenses among manufacturing units.
3. Jurisdiction of the Assessing Officer to reopen the assessment based on "reason to believe".
4. Allegation of change of opinion by the Assessing Officer.
5. Validity of reopening notice based on the material obtained during subsequent assessment proceedings.

Detailed Analysis:

1. Challenge to the notice issued under Section 148 of the Income Tax Act, 1961:
The petitioner challenged the notice dated 14th March 2007 issued under Section 148 of the Income Tax Act, 1961, seeking to reopen the assessment for the Assessment Year 2002-03. The notice was initially stayed on 18th December 2007.

2. Allegation of disproportionate allocation of expenses among manufacturing units:
The petitioner had three manufacturing units, two of which were located in a backward region and eligible for tax benefits under Section 80IA/80IB. During the original assessment, the petitioner claimed deductions for these units. The Assessing Officer later alleged that there was a disproportionate allocation of expenses between the units eligible for deductions and those that were not, thereby inflating the profits of the eligible units.

3. Jurisdiction of the Assessing Officer to reopen the assessment based on "reason to believe":
The court emphasized that for the Assessing Officer to acquire jurisdiction to reopen an assessment under Section 147, there must be a "reason to believe" that income chargeable to tax has escaped assessment. This must be based on tangible material and not merely a change of opinion. The Supreme Court in Commissioner of Income Tax v/s. Kelvinator of India Ltd., 320 ITR 561, clarified that "reason to believe" must have a live link with the formation of the belief and cannot be based on a mere change of opinion.

4. Allegation of change of opinion by the Assessing Officer:
The petitioner argued that the reopening was based on a change of opinion, as the allocation of expenses had been scrutinized and accepted during the original assessment proceedings. The court noted that the Assessing Officer had indeed formed an opinion on the allocation of expenses during the original assessment, and the reopening notice was based on the same facts, thus constituting a change of opinion.

5. Validity of reopening notice based on the material obtained during subsequent assessment proceedings:
The Revenue argued that the reopening was based on tangible material obtained during the assessment for the year 2004-05. However, the court held that the reasons recorded at the time of issuing the reopening notice did not mention this material. The court reiterated that the validity of a reopening notice must be examined based on the reasons recorded at the time of issuing the notice, and any subsequent material cannot be used to support the notice.

Conclusion:
The court found that the reopening notice was based on a change of opinion and lacked the necessary jurisdictional basis. Consequently, the notice dated 14th March 2007 and the order disposing of the objections were set aside. The petition was allowed, and no order as to costs was made.

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